Australian Markets Weekly: 18 September 2017

Overview:

NAB changed its RBA rate call last Tuesday and is now forecasting the RBA to lift rates in August 2018 by 25bps to 1.75%. At this stage we don’t expect the cash rate to increase by much in the next few years – a cumulative 100bps of increases to 2½% by the end of 2019.

Will we be right? The most confident thing your scribe can say about last week’s changes is that it will not be the last change to our forecasts that we make. Our – or anyone’s forecasts – will not be perfect. What is important is that NAB is saying we have seen a turning point in Australia’s interest rate cycle driven by a run of better domestic data and continuing strength in the global economy.

For users of forecasts, such frankness may be unsettling, but it does not need to be. Forecasts are inherently uncertain given our limited ability to predict the future. Instead we encourage users to focus on the “big forces” behind forecasts and forecast changes, and the key messages they are conveying.

The key messages to take from NAB’s updated forecasts are we have likely reached the turning point in the interest rate cycle. What remains uncertain is the wages/inflation nexus. Our forecast, and our models, still rely on history and expect that if the economy continues to improve then wage growth and inflation will eventually pick up. Of course it will be important to watch incoming wage/inflation data and adjust our models.

If our forecasts turn out as expected, then Australian businesses and households will be in better shape in a year from now. If so, and with the current 1.5% cash rate 200bps below the RBA estimate of neutral, the RBA will likely take the opportunity to gradually lift the cash rate with the timing to be determined by the incoming data. As always though, incoming data and developments will determine the actual pace and timing of RBA interest rate increases – and our forecasts.

Locally, it’s a week of RBA focus in a light data week. First up is the RBA Board Minutes tomorrow, but most interest is likely in what the Governor says in Perth on Thursday, speaking on “The Next Chapter”. RBA Assistant Governor (Economic) Luci Ellis also speaks, at a business economists’ function on Wednesday, speaking we understand on the global economy.

Offshore, attention focuses on the Fed with an expected announcement to formally commence the wind-down of their $4½t balance sheet. Equal if not of more interest to the market will be in the Fed’s new set of forecasts especially for the Fed funds rate. NZ has its Q2 GDP out on Thursday as well as its too-close-to-call General Election on Saturday. Germany also has elections on Sunday with Chancellor Merkel the frontrunner.